Revenue: price multiplied by the quantity sold
Definition
Revenue: the money a business takes from customers for the goods and services it sells in a given period, before any costs are deducted.
- The figure moves whenever either the price or the number sold changes.
Example
- A market stall sells printed T-shirts at £12 each and sells 250 in a month.
- That £3,000 is every pound the owner took over the counter that month, and it is the ceiling on what the stall can possibly keep once the bills are paid.
Common Mistake
- Revenue is not profit, because the £3,000 still has to pay the pitch rent, the blank shirts and the ink.
- Watch the wording in a question, since revenue, sales revenue and turnover all name the same figure.
Example
- Greggs works on low prices and high volume, so a large revenue figure there says nothing until the cost of every sausage roll and every shop has been taken off.
Fixed, variable and total costs: does one more shirt change it?
Definition
Fixed costs: costs that do not change when output changes, such as rent, insurance and business rates.
Variable costs: costs that rise and fall directly with output, such as raw materials and packaging.
- Costs split into two kinds, and the split matters because only one of them moves when output moves.
Example
- Fixed costs: the stall pays £400 a month for its pitch and £50 for insurance, so its fixed costs are £450 a month.
- Variable costs: each shirt costs £5 in blanks and ink, so 250 shirts cost:
- The £450 is owed whether the owner sells 250 shirts or none at all, so even a wash-out month still takes £450 out of the bank account.
- The £1,250 would halve if the owner printed half as many shirts, because every single shirt carries its own £5 of materials.
- That £1,700 is the whole cost of running the stall for the month, and it is the figure the £3,000 of revenue has to beat.
- To sort any cost, ask whether printing one more shirt makes it rise: if it does the cost is variable, and if it does not the cost is fixed.
Profit and loss: revenue minus total costs
profit=revenue−total costs \text{profit} = \text{revenue} - \text{total costs} profit=revenue−total costs- A negative answer is a loss rather than a profit.
Example
- For the busy month the stall makes:
- That £1,300 is the owner's reward for the risk taken, and it can be drawn as income or put back into more stock and a better pitch.
Example
- A quiet month shows how fast the same stall slips the other way, because bad weather leaves it selling only 60 shirts.
- Revenue drops to:
- Variable costs drop with it to:
- Total costs are still:
- The rent and the insurance did not shrink when the sales did.
- This is a loss of £30 for the month.
- The £450 of fixed costs had to be paid even though 190 fewer shirts sold, so a quiet month hurts twice over: revenue collapses with demand while the fixed bills sit still, leaving the owner to find that £30 out of savings.
Interest: what borrowed money costs the business
Definition
Interest: the charge a lender adds for borrowing money, expressed as a percentage of the amount borrowed and found from the difference between the total repayment and the amount borrowed.
- The exam hands over the total repayment and the amount borrowed and asks for the interest as a percentage, and formulae are not provided in the paper so this one has to be recalled.
Example
- The stall owner borrows £5,000 for a year to buy a heat press and repays £5,300 in total, so in cash terms the loan costs:
- The press really costs £5,300 rather than the £5,000 on the price tag.
- The formula turns that £300 into a rate:
- That 6 per cent is the price of borrowing, and it is a cost the business has to cover out of its profit, so the £300 would cut the £1,300 profit of a busy month to £1,000.
- The interest is owed whether trading is good or bad, so like the £450 of rent and insurance it still arrives in a wash-out month, and quoting the charge as a rate rather than as £300 lets the owner hold one lender's 6 per cent against another's 9 per cent and take the cheaper offer.
Exam technique
- Write the formula, substitute the figures, then give the answer with a £ sign, because the method marks survive an arithmetic slip.
- Multiply the variable cost per unit by the actual output before adding fixed costs, since the £5 given is the cost of one shirt and not the month's total.
- Show a negative result as a minus figure or label it a loss, because £30 written on its own reads as a profit.
- End every calculation with one sentence on what the number means for the owner, as that is where the interpretation mark sits.
Self review
- Give the formula for revenue.
- Fixed costs are £450 and variable costs are £300, so what are total costs?
- Which type of cost still has to be paid in a month when nothing at all is sold?
- Why does a fall in sales push a business towards a loss?
- A business borrows £8,000 and repays £8,640 in total over the year.
- Calculate the interest on that loan as a percentage.
